Today the Insider focuses on one of the biggest challenges facing state regulators: ensuring that every employer carries workers compensation insurance for their employees. It might sound simple, but it isn’t.
Premium Avoidance = Fraud
There are many ways to avoid paying workers comp premiums. (Washington State has a list of red flags for employer fraud.) Some employers keep the entire operation off the books. They pay their workers in cash. They do not pay any taxes. If an employee is hurt, they instruct the individual to tell the doctor it happened at home. These operations are exposed when a laid off worker tries to collect unemployment, or when a worker suffers a relatively serious injury and it becomes clear that the injury occurred at work. This type of operation can occur in any small business and is especially prevalent among the employers of undocumented workers.
Other employers are more sophisticated. They carry some workers on the regular payroll, deducting taxes and providing workers comp coverage. Another tier of employees are called “independent contractors” and are paid through 1099 forms or in cash. These people, while excluded from the regular payroll, may well show up on workers comp loss runs when they suffer serious injuries.
Finally, in a practice very common in home construction, a general contractor may hire a crew and call them all “independent” — even though the GC controls the work and the workers fail to meet accepted standards for independence. Again, construction is a preferred field for undocumented workers (a shift from their prior primary involvement in agricultural harvesting). When these people get hurt, the costs of treatment are ultimately absorbed by legitimately insured businesses. For example, the Trust Fund in Massachusetts provides the medical care and indemnity for uninsured workers; the fund itself is underwritten through a surcharge on every comp policy written in the state.
We have already written about state efforts to crack down on the abuse of “independent contractors.” Premium auditors are routinely adding the costs of uninsured subcontractors to the payroll of fully insured GCs. In doing so, they increase the cost of doing business for employers with insurance. By contrast, employers who forego coverage in the first place avoid premium payments altogether. In running seminars for small employers, I often hear them say that this is not fair. The playing field is not level. They are absolutely right.
Leveling the Playing Field
The Insider recently spoke to regulators in Massachusetts, where Commissioner John Chapman has spearheaded a concerted effort to identify uninsured employers and force them into the system. The state has undertaken a public awareness campaign to get out the message: workers comp is not an option, but a requirement for anyone with one or more employees doing business in the state. The multi-lingual campaign targets the industries prone to abuse: construction, landscaping and restaurants. The state has set up a hotline (1-877-MASS SAFE), which is currently pulling in 2,000 calls a month. When legitimate businesses become aware of uninsured competitors, they can call this “tip line” anonymously. State investigators winnow the tips down to about 20 stop work orders a month, which may in turn lead to criminal complaints. (For more background on this enforcement program, check out General Counsel Gregory White’s article.)
The Commonwealth would like to expand the arsenal in the fight against premium fraud to include the ability to revoke drivers licenses and vehicle registrations for non-compliant employers. While there are a number of effective ways to get the attention of employers who refuse to buy insurance, I imagine that keeping them (and their commercial fleets) off the road would be quite effective. There is pending legislation to provide this kind of authority to the state.
Premium Fraud in the Immigrant Community
It’s pretty obvious that workers comp coverage will be rare among the employers of undocumented workers. There are powerful and contradictory forces at work here: on the one hand, fearing deportation, illegal workers may prefer to be paid in cash and are unlikely focus on their entitlement to workers comp or unemployment benefits until they are injured or laid off. On the other hand, courts have ruled that even undocumented workers are entitled to comp benefits. So what can states do to drive coverage deeper into the employers within immigrant communities? Is it feasible for the state to reach out to advocates in immigrant communities to garner support for their enforcement effort? Or will the deep-rooted suspicion of all government agencies doom such outreach to failure? Community activists currently encourage injured workers to secure workers comp benefits. Will they put the same energy into reporting local employers who are avoiding the system? Will the activists be willing to drop a dime on abusive employers?
The unlevel playing field is unfair to legitimate businesses, which not only bear the costs of their own insurance, but those of the uninsured as well. It’s hard to compete with companies that avoid insurance premiums and thus lower their overhead by as much as 40%. State regulators owe legitimate businesses a credible and full scale effort to ensure that all employers carry workers comp coverage. As we can see in the Massachusetts model, it’s not easy, but it can be done.

Our colleague Peter Rousmaniere has been traveling the country, researching the intersection of undocumented workers and the workers comp system. In an editorial appearing in today’s Boston Globe (free registration required), he explores one of the most compelling problems associated with undocumented workers, the dramatic erosion of long-standing safety standards. Undocumented workers tend to take on the least desirable and the most dangerous jobs. They lack basic education and training. And they are unlikely to benefit from conventional safety and post-injury management programs. Taken together, these factors place undocumented workers at higher risk for serious injury and fatalities. Rousmaniere asserts that the individual states have a vested interest – and a moral obligation – to tackle this problem head on.
Tough Jobs
Rousmaniere writes that in Massachusetts as elsewhere, employers are outsourcing cleanup, construction, and other risky work to small firms, which can operate outside of the usual safety nets with relative ease. By hiring undocumented workers, these companies have an intimidated workforce that is undereducated, unable to speak English and in constant fear of deportation.
While no one really knows how big the problem is, Rousmaniere estimates that one fifth of all in-state jobs designed for less than a high school degree are filled by undocumented workers. He believes that in some sectors this percentage is over 50 percent. In construction, there are entire crews of painters, roofers, framers and masons who are paid in cash and are thus “off the books.” The companies employing these undocumented workers are able to provide services at rates substantially lower than their properly insured competitors.
What Can Be Done?
Rousmaniere has a number of recommendations for the states dealing with large scale problems of undocumented workers. These include:
Launching a gubernatorial task force to explore the full extent of the problem (although some governors would probably rather pretend that the problem does not exist)
Creating a computer database of employers and their workers’ compensation coverage (why not require every employer to post a certificate of insurance listing the total number of employees?)
Engaging doctors to report suspicious cases
Training community activists on what to look for and how to report cases of abuse.
Perhaps most important, strengthening enforcement activities. This includes raising employer penalties for repeated safety violations and workers’ comp insurance fraud. (Until the enforcement effort is credible, the risks of exposure for non-compliant employers will remain minimal. For Florida’s take on enforcement, check out this article from the Insurance Journal.)
Rousmaniere frames the problem as one of worker safety. This is a productive way of looking at undocumented workers. While one can argue about whether these people should be working at all, there should be no argument about the need for safe working conditions. To be sure, some accountability falls to the people who are working illegally. But the brunt of accountability should lie with those who profit most from the sweat of these disenfranchised workers. Until employers are held accountable, the unsafe working conditions and the exploitation of the most vulnerable workers will continue to grow exponentially. This is a crisis, even if we are all acting as if it’s just business as usual.